Warren Buffett is Right: Dow One Million is Not Ridiculous

Warren Buffett recently suggested that we could see the Dow Jones Industrial Average hit the one million mark within the next 100 years.  He says it is not a ridiculous forecast at all if you do the math.

According to this article from USA Today, the Dow would only have to go up by 3.87% per year for the next 100 years to hit the 1,000,000 mark.  This is quite doable, given that the index has gained an average of 5.73% per year over the last century.

The Dow is currently trading well above the 20,000 mark.  It would only have to go up by a multiple of a little under 50 times its current value.  While a 50 times return on an investment is huge, it isn’t huge when you use the compounding effect over a 100-year period of time.

Therefore, unfortunately, Buffett is right.  I say “unfortunately” for a reason.

In fact, I will one up Buffett and say that Dow one million is possible within the next 30 years.  And it is all possible for one reason: the central bank’s ability to create money out of thin air.

When we talk of Dow one million, we are talking about it in nominal terms.  We are not talking about the real inflation-adjusted value.

The primary reason the market goes up is because of monetary inflation.  They are not necessarily directly correlated in the short run, but the broad stock market will tend to move somewhat in correlation with the money supply over the longer run.

When I say or write this, it puzzles most people.  This is because we are accustomed to the world we live in.  When you have experienced inflation your entire life, you can’t imagine a world without inflation.

In a true free market without significant monetary inflation, a broad index of stocks would not likely go significantly higher, at least in terms of capital gains.  The main idea of becoming a shareholder (owning a piece of a company) is to share in the profits.  This is typically expressed in the form of dividends, at least when the government’s tax and regulatory schemes are not distorting this process.  When a company has greater dividends, or when investors believe that dividends will likely be higher in the future, then the share price will typically rise in response.

But on net, you wouldn’t see the significant capital gains in the broad market that we see today, even when accounting for the busts.  In a free market with relatively stable money, investors would buy shares to benefit from the dividends and the possibility of capital gains.  But someone buying an index fund probably wouldn’t be counting on the capital gains.  However, with increased technology and production, coupled with relatively stable money, the purchasing power of their money would likely increase.

There are many problems that the Federal Reserve and other central banks present.  Monetary inflation redistributes wealth.  It manipulates and distorts interest rates.  It causes artificial booms and busts in the economy.  Overall, it misallocates resources and makes us poorer on net.

Inflation is especially problematic for those trying to plan for the future.  This can include entrepreneurs.  It can also include people looking towards retirement.

How are you supposed to plan for retirement if you have no idea what your money is going to be able to buy 10 or 20 years down the line?  At least when you are working, you can hope that your wages will keep up with price inflation, even if they do lag behind.

We should hope that we won’t see Dow one million, even if it is 100 years from now.  We especially wouldn’t want to see it in the next few decades.

I know that people often equate a booming stock market with good economic times.  But these times are often the misallocations.

It feels like good times when you are on a lavish vacation, and you really probably are having a good time.  But you are consuming resources and your bank account is going lower.  It is not sustainable, and your vacation will eventually come to an end.  So too, will the boom.

We should hope that the government and central bank adopt some kind of gold standard.  Better yet, the Federal Reserve Act should be repealed, and we should have a completely free market in money.  But barring this radical move towards liberty, we should at least hope that the Fed engages in minimal, if any, monetary inflation.  Our living standards would be far better off in the long run.

If the Fed took a tight money stance over a long period of time, with no indication that it would return to loose money, then stocks would suffer greatly, at least in nominal terms.  But we would actually be more prosperous, as more resources would be allocated in accordance with consumer demand.

Buffett believes people should buy and hold index funds.  He recommends almost the exact opposite of what he did to become rich.  Buffett says you should bet on the U.S. economy.  With his talk of the Dow hitting one million, he is not so much betting on the U.S. economy as he is betting on continued monetary inflation.

Libertarian Thoughts on NFL Players Taking a Knee

While I am quite opinionated on political matters, I haven’t gotten particularly worked up over the situation in the NFL and players taking a knee during the national anthem.  As with many things political though, I have criticisms of both major sides.

Here are some random libertarian thoughts on the whole situation, in no particular order of importance.

  1. If the players were protesting war overseas and the killing of innocent people, I would be fully on board with their stand.
  2. If the players were protesting the drug war that likely does disproportionately impact the black community, then I would be fully on board.
  3. Some of the players taking a knee probably can’t even articulate why they are doing it, except for using a couple of phrases they are repeating.
  4. Unfortunately, Colin Kaepernick, the person who started it all, is sympathetic towards socialism and tyrannical dictators.  While American justice is far from perfect, it pales in comparison to the victims of Castro and Guevara.  With this statement, I am not talking about the victims of U.S. foreign policy.
  5. I think much of middle class America sees it as hypocritical for a bunch of millionaire athletes taking a stand against black oppression.
  6. I have never been in the military and I have never been directly hurt by the military, but it doesn’t mean I can’t take a stand on foreign policy.  Therefore, even though these players are doing well financially (or should be), it doesn’t mean they can’t take a stand for those who aren’t doing well.
  7. On the other hand, it does dilute the message talking about black oppression when it is coming from people who have done very well for the most part.  I wonder if their ancestors from 200 years ago would take offense to this.  Are they really oppressed as compared to what took place 200 years ago, or even 80 years ago?  To me, it isn’t in the same ballpark.  I am saying this with the full acknowledgement that there will likely always be some injustices in this world.
  8. I like to watch football to escape politics.  I like the entertainment.  Is there anywhere I can turn for some entertainment for an escape now?
  9. It isn’t as if the NFL has now just become political.  It was already horrible.  Every time I go to a game, I am surrounded by flyover jets, a giant flag covering the field, military appreciation, and the continuous honoring of military veterans.  It is all war propaganda.  It was no surprise to learn that our tax money is used to pay NFL teams to promote the war propaganda.
  10. What is this ritual of putting our hands over our hearts during the national anthem?  Is there much difference between this and the Nazi salute?  It is a show of nationalism and obedience to the state.  That is just my opinion on the matter, and I know most will disagree.
  11. I also can’t stand the pledge of allegiance.  I pledge allegiance to my family and to not harming others who do no harm to me.  I don’t want to pledge allegiance to the state.
  12. How about we just stop playing the anthem before sporting events?
  13. I have defended Trump on some of his Tweets and other things in the past, or at least pointed out that his enemies are irrationally hysterical.  But his comments on this situation in the NFL are really stupid, for lack of a better word.  While it is better than making threats against North Korea, it is still terribly divisive for no reason.  He really needs to start minding his own business in many ways.
  14. If the fans really don’t like all of this, then they do have the choice to stop attending and watching NFL games.  This may have already started in significant numbers.  The marketplace will sort this whole thing out.  Player salaries may end up going down if ratings take a hit.  This will hurt all players, including those who are standing for the anthem.
  15. ESPN has already been hit with bad ratings as compared to previous times.  I think a large part of this is the network’s almost obsession with politics and culture.  I don’t want to tune into SportsCenter to hear about how heroic Caitlyn Jenner is for turning into a woman.  I want to watch sports highlights.  Again, I am trying to get away from politics and cultural debates.
  16. It is really funny and sad to actually hear people think that the government should get involved in such matters.  It is the same when I hear people saying that flag burning should be illegal.  They want to cheer on the flag and sing about the land of the free, yet they don’t see the contradiction.
  17. I am so tired of people talking about “1st Amendment rights”.  I mean, has anyone saying this actually read the 1st Amendment?  It says that Congress shall make no law.  As long as Congress is not passing a law (or threatening to do so) preventing players from speaking out or taking a knee, then it has nothing to do with the 1st Amendment.
  18. Just because players have a right to take a knee (because it probably wasn’t spelled out in their contract), it doesn’t mean they are protected from all consequences.  If you work in an office, what would happen if you walk up to your boss and call him a jerk?  Can you just claim your right to free speech and expect no consequences?
  19. You should have the right to speak freely, but this does not trump property rights or freedom of association, or at least it shouldn’t.
  20. If only we could get some Americans to stand up as passionately for the millions of victims of U.S. foreign policy.

These are my own libertarian thoughts and do not necessarily represent the thoughts of other libertarians.

Monetary Deflation, Here We Come

The Federal Open Market Committee (FOMC) released its latest statement on monetary policy on September 20, 2017. Whereas everyone was talking about interest rates before, now we have a second issue.

For interest rates, which is the target federal funds rate, the target will remain the same for now, which is between 1% and 1.25%. The Fed has been controlling this rate by paying interest to banks on required and excess reserves. Even though the target rate will remain the same for now, there is an expectation that this rate will go up another one-quarter percent in December.

The bigger news is the Fed’s balance sheet. Starting in October, the Fed will begin what is referred to as a “balance sheet normalization program”.

In the FOMC’s implementation notes, the details are spelled out. The Fed will only roll over maturing debt after it exceeds a certain amount. Starting in October, it will be $6 billion for Treasury debt and $4 billion for mortgage-backed securities. In total, the Fed will stop rolling over $10 billion in debt each month. In other words, the Fed’s balance sheet will be reduced by approximately $10 billion each month.

This reduction should increase if the Fed sticks by the description from the June 2017 statement. If it continues on course, it will eventually be draining its balance sheet by a total of $50 billion per month. When this ends, nobody knows.

Of course, if economic conditions change significantly, it could easily impact this whole process of balance sheet normalization.

Despite Janet Yellen’s reputation as a Keynesian, she has been far better than Bernanke up to this point. This isn’t saying much though, because Bernanke didn’t do much until the financial crisis hit. That is when he turned up the digital printing presses.

QE3 ended in October 2014, shortly after Yellen took office. We have seen very little monetary inflation from Yellen’s Fed. Still, this is after a period of unprecedented monetary inflation (2008 to 2014).

It is important to realize though that we are about to see actual monetary deflation, assuming the Fed follows through with what the FOMC statement says. While the Fed will not actually have to sell off its assets, it is essentially doing the same thing by not rolling over maturing debt. It is not clear how the Fed will get rid of its mortgage-backed securities, since so much of this was bad debt to begin with.

Based on this policy, we should see the monetary base and corresponding balance sheet go down. This is monetary deflation. It does not mean we have to see consumer price deflation.

You have to wonder how long all of this will last though. It has been 9 years since the worst of the financial crisis became apparent. There has been huge monetary inflation, but not huge consumer price inflation. We have seen asset price inflation, especially when it comes to stocks.

The Fed handed stock investors a gift. For people who bought in March 2009, they really got a gift. They would be wise not to be too greedy.

The Fed will also take it all away. If the big rise in U.S. stocks is primarily due to the Fed’s loose monetary policy, then we should not be surprised when a deflationary policy takes it all away.

Things take time to play out. Investors have been expecting this announcement for a while now. Investors also know that the Fed still stands as the lender of last resort in any kind of crisis.

The stock rally may last longer before heading down. It is hard to bet against a rising market. At the same time, the Fed’s new policy of monetary deflation should send warning signals to those who own stocks. What the Fed has “given” us, it will also take away.

How the Government Subverts the Will of the People

While I am not a big fan of democracy when it comes to the state, I often find myself wishing that we actually were more democratic.

Democracy is somewhat of an anti-libertarian idea.  Much of the Bill of Rights is anti-democratic in nature.  The government shall not prohibit your speech, even if it is unpopular.  There is no need to protect popular speech, as that will naturally be allowed.  The key is to protect unpopular speech, as long as the speech is not threatening violence.

Democracy can be thought of as two wolves and a sheep voting on what’s for dinner.  Taken to its extreme, democracy will naturally violate property rights and individual liberty.

With that said, certain democratic processes can help protect individual liberty from an overreaching government.  Also, it is important to note that democracy is only dangerous when we are talking about violence or encroaching on property.  In other words, democracy is dangerous when it comes to dealing with the state because the state uses force or the threat of force to make people comply.

If you and your friends have a vote on where to go for dinner, there is no harm done.  Sure, you may not like the choice of restaurant that a majority of your friends picked, but you are not forced to go out to dinner with them.  If you don’t like their choice, you are not compelled to go to that restaurant.

It seems in today’s world that we would often be better off if the politicians in Washington DC were to actually listen to their constituents.  The powers-that-be often ignore public opinion.

I want to illustrate this with two examples.

First, there is the bailing out of banks.  This was opposed by a large majority of Americans in 2008, but it happened anyway.  I think opinions would have changed if it had been a choice between bailing out the banks versus the bankruptcy of the FDIC.  In other words, people would only accept the bailouts if the alternative were seeing their checking and savings accounts gone because their bank had failed.

The government could have bailed out the banks just enough to make depositors whole, but of course, the bailouts went way beyond this.  The stock and bond holders of these companies should have essentially gone to zero.  This is one of the few industries where a libertarian could actually make a case for nationalization.  This is only because of the government’s explicit guarantees and interference in the industry in the first place.  If there were no central bank and FDIC, then this would not be acceptable from a libertarian standpoint.

The Federal Reserve (which is essentially a branch of the federal government) has figured out a way to bail out banks without any fuss.  The Fed pays interest on bank reserves.  Every time you hear an announcement of the Fed raising rates, this means that the Fed is paying more to the banks for their reserves.  The Fed is paying the banks not to lend.  Every time you hear about the Fed raising rates, think “bank bailout”.

This is barely reported in the establishment media.  Even for those paying attention to the likes of CNBC, it is not widely understood.  Most Americans don’t know this is happening.  The Fed gets to bail out banks (or subsidize them) without the American people even knowing.  It makes everything a lot cleaner from their end.

The second example of the federal government subverting the will of the people is in foreign policy.  There are secret operations all over the place, while most Americans remain in a state of ignorance.

One of the best examples is Syria.  To be sure, there are many other places we could use as examples.

The interesting thing about Syria is that Obama tried to go to war several years ago.  He was trying to get the American people on board with the idea of going after Syria in 2013, but Americans largely rejected the idea.  When John Kerry smugly stated that we could only avoid war if Assad were to give up his weapons, Putin pounced on the statement and said that Russia would ensure the removal of Assad’s chemical weapons.  War seemed to be averted.

Since that time, Obama, and then Trump, have waged war on Syria.  We hear of some stories about troops on the ground and bombings, but most of it is rhetoric.  We don’t hear that the U.S. government has essentially waged an all-out war against Assad, the person who is actually trying to get rid of ISIS.

Again, the will of the people is ignored.  The government relies on the establishment media to cover up these things.  The problem with the establishment media isn’t just that they lie, it is that they choose not to report certain things.

I do want to clarify that even though the politicians are ignoring public opinion, the American people could still put a stop to this stuff.  It is easy for someone to say they are against war with Syria in a survey.  But they may also say that we should be trying to eliminate ISIS.  And some people just don’t care that much, even if they have an opinion that leans one way.

If a large segment of the American population understood that these covert operations were taking place, and if they were strongly anti-war, then things would change.  Politicians can only go against public opinion up to a point.  If the public gets educated and demands certain things, then things will change.

The American people often hold contradictory opinions on things. Most people will say that they are against running up the national debt, but then in the next breath they will not be in favor of any major cuts in government spending.  Many people hold similar contradictory views on foreign policy.

Still, I think it is important to educate people and make them aware of what their government is doing in their name.  It is not enough just to say that you don’t favor a war or a bank bailout in a survey.  You have to have some knowledge of the subject, and you must have a firm set of principles.  Until that happens with a greater number of people, the politicians will continue to get away with things.  They will continue to subvert the weak will of the people.

CPI Report: The Mini-Boom Continues?

Over the last few years, there have been periods where the economy seems to be in something of a mini-boom phase.  The GDP numbers have remained low (but still mostly positive), but certain sectors seem to be booming.

To be sure, it hasn’t been an overall boom for the American middle class.  The only good news is that unemployment rates have dropped, although even these numbers are sketchy.  Some Americans have just given up looking for work, or have decided it isn’t cost effective to send a spouse back to work.  If incomes are low enough, the after-tax income of a spouse could be not much more than the cost of daycare for the children.

The primary areas for the boom have been stocks and housing.  Some might say we have a boom in bonds, but interest rates were already low.  Even in stocks and housing, it depends.  Some of the big names have done well, such as Apple and Amazon.  There have been some bad ones too.  It is just that the big stocks have tended to pull up the overall market.

In housing, it all depends on the location.  Some places, particularly in California, are probably in another bubble.  In most areas, there has been significant appreciation over the last 6 years or so, but still not up to levels that were seen 10 years ago.

The boom in stocks and housing has benefitted some in the middle class, but it has also hurt some in the middle class.  If you don’t own a house or stocks, then it doesn’t do you much good.  In fact, when it comes to housing, it is a detriment to anyone who doesn’t own.  They are priced out of the market, and they are likely paying higher rents.

When it comes to stocks, most middle class Americans don’t own stocks except for the mutual funds in their retirement accounts.  Unfortunately, they are going to see a good portion of the gains wiped away when the bust finally hits.

The problem with this mini-boom – especially in these two sectors – is that it is built on the Fed’s previous loose monetary policy from 2008 to 2014.  The appreciation in asset values can quickly vanish.

I think the consumer price index (CPI) numbers are not all that accurate.  The CPI doesn’t account enough for asset prices.  And low CPI numbers can deceive us in terms of the damage that the Fed is doing.  Even if the Fed’s monetary inflation doesn’t immediately result in high consumer price inflation, it is still misallocating resources.

Still, I think the CPI is useful for trends.  It can also somewhat tell us the demand for money.  The CPI numbers had been trending down, which threw up a cautionary flag for an impending bust.  It was signaling that maybe consumers had slowed down spending.  When consumers are spending less (not bidding up prices as much), this can result in lower consumer price inflation, all else being equal.

However, the latest CPI numbers for August 2017 show a bump up in price inflation.  The August CPI was up 0.4% from the previous month.  The more stable median CPI was up 0.2% from the previous month.

The year-over-year CPI is now at 1.9%, while the year-over-year median CPI is at 2.2%.

This is a slight reversal from the previous trend.  Since the CPI has picked up again, it indicates that this mini-boom may have some more legs.  Anyway, it seems that most asset bubbles last longer than what seems likely.  Therefore, even though I am light on stocks, I would not be surprised to see stocks run higher before the bust.

We can continue to keep an eye on the Fed’s monetary policy coupled with the CPI numbers.  It is also important to pay attention to the yield curve, as a flattening yield curve could indicate a coming recession.

Meanwhile, I am in cautious mode.  I don’t want to get too sucked into the boom, but I am also not ready to massively short the market.  This is why I recommend a permanent portfolio.

Do Investors in U.S. Government Debt Misallocate Resources?

The national debt recently topped $20 trillion.  This pales in comparison to the unfunded liabilities, which, by some estimates, are over $200 trillion.

The continual deficits and accumulation of government debt is a major problem.  Unfortunately, many people mistakenly believe that we are just burdening future generations.  In a sense, this is correct.  But they fail to realize that we are burdening ourselves right now.

When the Federal Reserve monetizes the debt (creates money out of thin air to buy the U.S. government debt), then it is a little more obvious for those who are paying attention.  The central bank’s creation of money means there is more money circulating, while it has done nothing to increase the production of goods and services.  This eventually means that our dollars are worth less than they otherwise would have been.

Although interest rates are still near historic all-time lows, the Fed has essentially not been buying U.S. government debt for nearly 3 years.  It has only rolled over maturing debt.  QE3 ended in October 2014.  Since that time, the adjusted monetary base has been relatively flat, or even slightly down.

This means that investors are buying U.S. government debt at low rates.  This could also include foreign central banks, although Japan and China – the two major buyers – have not been big buyers over the last few years.

Whether or not it is smart for private investors to buy U.S. government bonds is a separate issue.  U.S. government debt is still seen as something of a safe haven.  As long as there is no significant consumer price inflation, this will probably hold true.  And although interest rates are low, they could go lower in a recession, which means that the value of the bonds will increase.

But are these investors misallocating resources?  In a sense, they are.  But it is really the government spending the money that is the misallocation.  The bond investors are just helping to fund it at lower rates.

And this is where we are still harmed today.  The government is misallocating resources.  Virtually all government spending is a misallocation of resources unless it is spending money that would have been spent that same exact way anyway.  But if people were voluntarily willing to spend money building statues in a park, then it wouldn’t be necessary for the government to compel it.  Of course, you could make the argument that some people might be willing to voluntarily contribute to building statues in a park if it weren’t already being done by the government.  But we can be sure that not everyone would choose to spend their money in this way.

To be sure, most of the money spent by government at all levels has little to do with defending property and enforcing contracts.  All other spending has to be a misallocation or, at best, moot.  This isn’t to say that some people don’t benefit at the expense of others with certain types of spending.  But on net, we are poorer when government spends money, as it is allocating resources that are not in accordance with the highest preferences of consumers.

When the government accumulates debt, it is spending extra money that it cannot get away with spending through direct taxation.  It is a hidden form of taxation.  But it isn’t just hurting future generations.  It is hurting us economically now.  It is diverting real resources to other uses than what would otherwise be freely chosen by consumers in an open market.

Debt does hurt future generations as well.  But the main way it hurts future generations is that we are reducing advances in production and technology now.  We are reducing the rate of compounding growth.

Imagine if the whole world hadn’t advanced for 2,000 years up until the year 1950.  Even if free markets were introduced at that time with substantial growth, we would be far poorer today.  People would have had to invent electricity, airplanes, automobiles, the telephone, and so many other things after this period.  We would be really poor today if this had been the case.  We build off of previous generations.

In conclusion, it doesn’t matter who is buying the U.S. government’s debt.  The problem is that the U.S. government is spending so much money and misallocating resources.  We are poorer than we otherwise would be.  This accumulation of debt hurts our living standards today.

Capitalism and Surviving a Hurricane

I live in Florida and am preparing for Hurricane Irma.  Since I am on the east coast and to the north, we expect the equivalent of a strong tropical storm or a low-grade hurricane.

As of now, it looks as though the west coast of Florida is going to get hit the hardest.  I have family that live on the west coast, and some of them have evacuated to my house.

On this Saturday night, about a day before the storm is to hit, we went out.  I made a stop at the grocery store to get a few last-minute things.  The grocery store had given notice that it would close at 6:00 PM, and it would not reopen until the hurricane passes.

After a short trip to the store, we went to a barbecue restaurant and had a delicious meal that was very filling.  There were only a couple of servers for the whole restaurant, but they were working hard to get food to the people who were there.  I don’t expect many places to be open tomorrow (Sunday) right before the storm hits.

On Friday, I was able to fill up my car with gasoline.  It was still a little over half full, but I wanted to top it off.  The first station I went to was out of gas.  The second station I went to had plenty at the time and there was no wait.

Supposedly, the governor lifted trucking restrictions in the state to enable plenty of fuel tankers to go in and out.  Gas has been in high demand, as millions of people have evacuated.  It makes you wonder why there are restrictions at all on truck deliveries.

Despite our world of government interference in virtually every aspect of our lives, people still manage to function.  The elements of the free market that exist are still very powerful in the face of government interference.

The grocery store and restaurant did not have to stay open.  They were trying to balance the needs of their employees with the needs of their customers.  I was quite pleased with the service from both places.  Just the fact that they were open about 24 hours before a hurricane was hitting was a great service to me and many others.

I have written before about price gouging laws and how they hurt people during critical times.  Higher prices tamper demand and tend to bring in new supplies more quickly.  The higher prices are a signal that there is a shortage that needs to be cured.

But despite the price gouging laws, businesses are still able to function to a high degree.   Stores would get in new shipments of water.  While the shelves were certainly empty in some spots, there was still plenty of food that did not require refrigeration.

The fuel situation is even more incredible.  The fact that fuel tankers from all over were able to deliver fuel and mostly meet the high demand is wonderful.  And with another hat tip to the free market, people were using apps on their smartphones to tell them which gas stations had gas available.

Free market economics is voluntary economics.  It means that the market is free from coercion.  It means that people function through voluntary association.  In the free market, businesses can only profit in the long run by pleasing its customers.  Whether this is through pure greed or through some sense of goodness, it doesn’t matter all that much, as long as consumer wants and needs are being met.

I have witnessed much goodwill during this time.  There are also businesses that want to make a profit, which is fine.  Many businesses have a longer-term vision of wanting to please customers now so that they will remember to come back in the future.

Whatever the motivations, the elements of the free market that exist make our lives what they are.  We take for granted everything that voluntary associations provide for us.  They sometimes are more evident during times of turmoil.

Who Says the Fed Has a Loose Monetary Policy?

Those who talk most about the Fed tend to be critics of the Fed.  If the general public understood the Fed’s real purpose (to fund deficits and act as a lender of last resort), then it would quickly be shut down.  The Fed enables hidden theft of the general public through currency depreciation.

Unfortunately, some of the strongest critics of the Fed (and central banking in general) have been making a mistake over the last few years.  They say that the Fed has a loose monetary policy.  If they were talking in generalities about the Fed’s existence over the last century, then this would certainly be true.  If they were talking about the Fed from 2008 to 2014, this would certainly be true.

However, to say that the Fed currently has a loose monetary policy is somewhat deceiving at best.  I don’t think they are intentionally trying to mislead people on this subject, but it isn’t accurate.

The Fed ended QE3 in October 2014.  From the fall of 2008 until then, the adjusted monetary base rose approximately five fold.  This was unprecedented to say the least.  Since much of the new money when into bank reserves, coupled with the higher demand for money from the deep recession, consumer price inflation has stayed relatively low.  Asset price inflation has not been as low, especially when looking at stocks.

Since QE3 ended nearly three years ago, the monetary base has essentially been flat, or even slightly down.  Therefore, you can’t really accurately say that the Fed has a loose monetary policy or that the government is currently paying for its debts through money printing.  It just isn’t the case.

On October 29, 2014, the monetary base stood at $3.976 trillion.  On August 30, 2017, the monetary base stood at $3.942 trillion.  It has slightly decreased in just under three years.  The federal government may be running deficits, but it is not the Fed buying the debt right now.  Sure, the Fed rolls over maturing debt, but it is not adding anything new in any significant way.  It is investors and foreign central banks buying this debt.

If the Fed had a press conference and announced it would no longer buy U.S. government debt ever again, then certainly the bond market would crash and interest rates would spike.  The Fed’s presence supports the bond market.  But it is misleading to say that the Fed is currently creating new money out of thin air.

Some will point to the ultra low interest rates.  Again, the Fed is not directly impacting this.  If anything, it has tried to raise rates by increasing the rate it pays on bank reserves.  This is a quiet way of continuing to bail out banks.  But the Fed’s control of the monetary base is not keeping interest rates down.  It is not controlling interest rates through the monetary base because of the huge amounts of excess reserves.  It can only control its target rate through other means, such as paying interest to banks.

The Fed’s previous loose monetary policy is still having an impact in keeping rates below normal.  But again, it is not because of its current policy.  The Fed’s current policy is that of tight money.

Janet Yellen has actually been pretty good in this respect.  Then again, Bernanke was pretty good too up until the crash in the fall of 2008.  If the economy tanks again, you can be sure that Yellen, or whoever is the Fed chair, will step in with an aggressive policy of digital money printing.

The Fed should have kept a tight money policy in the face of the deep recession in 2008/ 2009.  Even if it had just bailed out the banks enough to make depositors whole, we would have been better off than having the massive funding of deficits and the bailouts of car companies and others.  We would have far more prosperity today if the Fed had kept a tighter policy since 2008.

The damage was done from 2008 to 2014.  Even though the Fed has adopted a better policy since that time, the damage cannot be undone without some kind of pain.  The misallocations have to be corrected.  The Fed’s current policy makes it more likely that we will see a correction sooner rather than later.  It is not like China where the severe misallocations carry on for a couple of decades.

Overall, this is good.  We don’t want to be like China with ghost cities.  We want resources to be allocated to projects that fulfill the highest priorities of consumers.  Only a free market environment can properly allocate these resources in accordance with consumer demand.

In conclusion, the Fed has not had a loose monetary policy since October 2014.  The major damage in monetary terms was done prior to this.  The federal government continues to do damage all the time by spending too much and regulating too much.

The Fed has adopted the correct policy for the last three years.  But there is still a price to pay for the previous loose policy.  Unfortunately, when the correction happens to realign resources to their proper uses, the Fed will likely make the same mistake over again.  Then we can look forward to QE4.

How Will Gold End 2017?

The dollar price of gold has shot up past $1,300 per ounce, and it has held above that mark for now.  Gold has been a lackluster investment since 2011, while U.S. stocks have been in a bull market.

Is all of this about to change?  And if gold keeps going up, can it go up if stocks fall?

Gold and stocks have a rather strange correlation.  There are times they go up and down together, and there are times that they go in opposite directions.  But they aren’t completely uncorrelated either. There is news that can drive prices for both assets.  This is especially true when it comes to news of the Federal Reserve.

Over the long run, both gold and stocks benefit from a loose monetary policy from the central bank, particularly in nominal terms.  In real (inflation adjusted) terms, this is a lot harder to argue.

If there were no monetary inflation, then it is likely that neither gold nor stocks would rise with any significance over long periods of time.  It wouldn’t necessarily make them bad investments.  In a relative free market, they would both gain purchasing power.  In the case of stocks, you could still own stocks for dividends.  Of course, some individual stocks would do well in terms of capital gains on share prices, but the overall market would likely be relatively flat.  The best companies would get rewarded with higher share prices, as they would have the potential of paying out greater dividends.

In our current world of central banking, we have artificial booms and busts to deal with.  Both assets will tend to overshoot in both bull and bear markets.  Stocks are likely going way above where they should be right now, and they could still go higher yet.  But when the bust comes, they will probably over correct and fall further than they should.  This is mostly due to monetary policy though.  We wouldn’t have these huge bubbles and subsequent corrections if we didn’t have significant central bank monetary inflation in the first place.

Overall, I think gold is a decent investment right now.  And as usual, it is a great insurance policy against unforeseen events in the world.  It is a hedge against disaster.  It is a hedge against big price inflation.

I advocate a permanent portfolio, which consists of 25% gold.  And while I am highly nervous about stocks right now, the portfolio also has 25% in stocks.  If we hit a deep recession, then the other 50% in bonds and cash will hold things up.  As long as it isn’t an inflationary recession, then bonds are probably the best place to be.

Gold is something of a wildcard with a recession.  It would typically go down with other asset prices.  But since it is a hedge against disaster and uncertainty, it might hold up better this time around.  There are a lot of things to make people nervous.

Also, if there is a recession, there will be anticipation of the Fed stopping its hiking of its target interest rate.  There will also be an expectation that any talk of a reduction in the Fed’s balance sheet would cease.  In fact, there would probably be good reason to speculate on QE4, which would be another round of digital money printing (a further expansion of its balance sheet).  Ultimately, this would be bullish for gold.

Until we hit that phase of another round of monetary inflation, I don’t expect gold to spike higher.  Sure, it could easily go to $1,400 or $1,500 per ounce.  But barring a major war or some other world disaster, it probably isn’t going to $2,000 any time soon.  There just isn’t enough fear of price inflation.

If the Fed returns to an ultra-loose monetary policy because of a recession, then perhaps inflation fears will return.  But until that happens, $2,000 gold is not likely in the near future.  This doesn’t make it a bad investment, but just one that you shouldn’t count on for having really high returns.

I have some speculative investments in gold funds right now.  These are funds that invest in gold (and other metals) mining stocks.  They are more leveraged and far more volatile than the price of gold.  But when gold is going higher, as it has in the last few weeks, the mining stocks shine.  I am fully aware that these carry a high degree of risk in the event of an economic downturn.

If economic conditions stay about the same, I expect the gold price to end 2017 somewhere near its current price.  Maybe it will get to $1,400 or pull back to $1,200, but I don’t expect much more volatility than that.

The volatility will come with changing economic conditions.  If stocks fall hard and a new recession hits, then gold investors will react.  I would expect prices to go down, but in today’s crazy economic world, anything is possible.  I like the 25% gold holdings in the permanent portfolio.  It is there for a reason.